Global equity markets are being dragged around by the oil price.
Major downside moves in oil has a tendency to pull stocks with it, but when we see a bounce back in the price of oil, we just see a stabilising in shares.
The enormous volatility in the oil market is unsettling investors around the world. The fear of falling inflation and reduced growth prospects is at the forefront of traders’ minds. It is not unusual for us to witness rallies but the big picture is that oil has been falling since March, and now the sell-offs are becoming even more severe.
This week we saw oil inventories in the US fall by 2.5 million barrels, which easily exceeded the 2.1 million barrels decline that analysts were expecting. There was an initial spike in the market, but it quickly turned over on itself. Stockpiles are falling, but they are still well above five-year averages, and ultimately the over-supply isn’t being chipped away at fast enough. Last week the Baker Hughes rig count climbed for its 22nd consecutive week – a new record. Some US shale producers have breakeven costs below $40 per barrel. This is fuelling the over-supply fears.
OPEC’s production cut failed to prop up the price, in fact it had the opposite effect. Libya, Nigeria and Iran are exempt from the deal and their rising production levels is adding to the problem. OPEC’s ability to influence the price of oil is being called into question.
It has been an interesting week for central banker commentary. The Bank of England’s (BoE) Andy Haldane talked about raising interest rates later this year. Mr Haldane backed the aggressive easing from the BoE last year, but now feels keeping rates ultra-low for too long could be problematic. The central banker knows all too well that an overly weak pound will punish the British consumer in the form of higher inflation. A steadier pound would prevent the consumer price index (CPI) from running away.
The outgoing BoE member Kristin Forbes, reiterated her view the UK needs to raise rates. Speaking at the London Business School, Ms Forbes stated that the BoE should not put off increasing rates any longer.
Federal Reserve member Jerome Powell called for an easing of the Dodd-Frank rules for smaller banks, he feels, it should only be applied to larger institutions. The post credit crisis regulation was good for financial stability at the time, but now it is holding back regional banks.
EUR/USD – has been trading within the 1.11 to 1.13 range for nearly one month, and recently the bias has been to the downside. Rallies will encounter resistance at 1.12, there has been a considerable amount of consolidation in this area. A decisive break below 1.11, would put 1.10 on the radar.
GBP/USD – is being supported by the 100-day moving average, if this level holds, the resistance at 1.28 could come into play and beyond that bulls will look to the 50-day moving average. Should it fall below the 100-day moving average, then the 200-day moving average will be the next price to watch. 1.2370, would be the next support area below the 200-day MA.
EUR/GBP – has risen over the past two months, and 0.8845 is the initial resistance to watch out for, and if it is cleared, dealers will look to 0.8866. Pullbacks will find support at 0.8770 and the 0.8720 region.
USD/JPY – is trapped between the 200-day and the 100-day moving average. A move above the 100-day MA, would put 112.10 on the radar. A drop below the 200-day MA, and sellers will be looking to the support at 110.30 and 108.80.
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